Amazon FBA, Pros and Cons of Fulfilling via Amazon?
Companies marketing their products on Amazon have numerous distribution options, and making the right decision for your needs and type of business can mean the difference between success and failure. If you're looking at an eCommerce business for sale or putting your company on the market through a website broker, it's equally important to understand what the current distribution model offers as far as benefits and disadvantages to see how your business may be valued by buyers. For those new to Amazon, this article helps you understand Fulfillment by Amazon and whether it's a benefit or disadvantage in a business. The answer is, it depends; but for many, it can be a very effective marketing channel. Read on to understand why.
What is Amazon FBA?
Amazon FBA (or Fulfillment by Amazon) is a distribution model the eCommerce giant offers sellers. Companies (manufacturers and retailers alike) can list their inventory for sale on Amazon. When doing so, you can choose to handle all of the shipping and distribution matters yourself, or you can pay Amazon to do it all (from warehousing to shipping to returns) for you. It basically works as follows.
You decide what products you want to list on Amazon and have Amazon fulfill.
You ship a certain amount of those products to Amazon after preparing them with appropriate tags and UPC codes.
Amazon houses the items in its own warehouse.
Amazon picks and ships items when customers order them.
Amazon handles return and refund issues.
You receive payment for your sales minus some Amazon FBA fees.
The Pros: Top Perks of Amazon FBA
The Amazon FB program has a lot of perks, and if you're looking for an eCommerce business for sale, you know one that already has Amazon FBA in place has a powerful distribution channel at its disposal. One of the biggest benefits of Amazon FBA is that you, the business, don't need to manage your own shipping processes. Amazon picks the product, ensures it ships in a timely manner, and handles complaints and issues about shipping. That takes some risk — and a lot of labor requirements — off your business. You can accommodate more product movement with less staff and concentrate on other areas of your company, such as marketing products or R&D.
Another huge benefit of Amazon FBA is that your products automatically get the Prime logo and shipping option. Millions of customers use Prime to get free, fast shipping when they order from the site, and many only view products filtered by prime. That logo means your products are more likely to be seen. Amazon also gives FBA customers buy box priority, which means in a list that includes other third-party sellers, your products will appear closer to the top. That's akin to your webpage ranking on the first page of Google: it means more people will click on, view, and hopefully buy your goods.
The Cons: Biggest Disadvantages
of Amazon FBA
It's not all ideal news for Amazon FBA customers. Inventory can be more difficult to maintain when it's not in your own location, so you'll need to ensure you have excellent record-keeping processes regarding stock. FBA is also a fee-based service; you pay a certain amount per square foot to store your goods and you can't get too close to zero storage or Amazon might charge a penalty fee. The online retailer wants to keep customers happy, so they make it essential that you keep stock on hand for quick fulfillment purposes.
Those accurate records mentioned above come in handy in determining how much stock you should send Amazon. Understocking leads to penalties or unhappy customers; overstocking means you pay continuously for Amazon to store items and may eventually require Amazon to destroy the stock or ship it back to you, both which come with a cost.
While Amazon FBA saves you a lot of work on backend distribution tasks, prepping to ship inventory to Amazon can be tedious. Amazon requires that you label every item with its ASIN/UPC system. You can't simply prep items for shipment as you sell them, so you'll need to commit to labor time to prep bulk batches.
Amazon uses a pooled storage method to warehouse goods. If you sell seemingly the same item as competitors, the products might all end up in the same bin and Amazon will pick randomly from that bin when fulfilling orders. This isn't always a huge issue, but there have been cases of competitors selling counterfeit or defective products and innocent FBA clients getting hit with the issues.
Finally, Amazon charges a hefty sum to warehouse and ship products on your behalf. When you take selling fees, CC processing and FBA into account, many sellers can pay 30% or more of their ticket price to Amazon as fees when using FBA. This means your products need to have strong margins to support this level of expense and still leave a reasonable profit behind for the seller. Accordingly, when using FBA, not all products will pass the profitability test.
The Bottom Line: Weighing the
Scales for Your Company or Business Purchase
For many businesses, the pros outweigh the cons when it comes to Amazon FBA. Yes, you pay for the services, but you get a huge break on shipping going through Amazon. You also get access to Amazon's marketing tools and multichannel distribution approach, which means potential exposure to a customer pool that would be very expensive or impossible to tap on your own.
Finally, when you run or purchase an eCommerce company that relies on Amazon FB, you get to handle your business, not your shipping. As long as you have good record-keeping processes for inventory and strong margins, the wins typically trump any intermittent losses.
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